Recession Versus Depression and How to Tell the Difference

What Makes a Depression So Much Worse than a Recession?

A recession is widespread economic decline that lasts for at least six months. A depression is a more severe decline that lasts for several years. For example, a recession lasts for 18 months, while the most recent depression lasted for a decade. There have been 33 recessions since 1854. There's only been one depression since then, The Great Depression of 1929. It was actually a combination of the recession that lasted from August 1929 to March 1933, and the one from May 1937 to June 1938. If you are wondering if we are in a depression or recession, it's probably a recession.

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In a recession, gross domestic product contracts for at least two quarters. But that's not all. There are many more economic indicators that signal a recession. That's because GDP growth will usually slow for several quarters before it turns negative. That's in response to sluggish consumer demand.

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What Is a Depression?

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A depression is an extended recession that has years, not quarters, of economic contraction. It's more severe than a recession. Unemployment reaches 25 percent, housing prices plummet 30 percent, and prices fall 10 percent. The economic devastation of a depression is so great that the effects of the Great Depression lasted for decades after it ended.

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A d​​epression on the scale of that in 1929 could not happen exactly the way it did before. Central banks around the world, including the U.S. Federal Reserve, are so much more aware of the importance of monetary policy in regulating the economy. Follow the Great Depression Timeline to find out what caused the Depression, how bad it was, and what finally ended it.

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The underlying cause of any recession is a loss of business or consumer confidence. There are 11 events that trigger this panic reaction. Without confidence in the future, consumers will stop buying and businesses will lay off workers. These situations create a downward economic spiral of unemployment, businesses failures, and bankruptcies.

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Since stocks are a piece of ownership in a company, the stock market is basically a vote of confidence in the future of all these companies and, as such, in the U.S. economy itself. A drop of 11 percent in a quarter indicates a sustained loss of confidence.

If confidence is not restored, the stock market will continue to fall over a sustained period of time. A prolonged downward trend would eventually indicate the start of a bear market. This could hurt the economy more and push it further toward a recession.

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During a Depression, Is My Money Safer Under the Mattress?

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During the Depression, there were many bank failures. This made people take their money out of the bank, known as a run on the bank. Fortunately, you don't have to hide your money under a mattress.

The Federal Deposit Insurance Corporation insures 100 percent of your savings, checking, and money market deposits. As long as you are within their guidelines, your money is safe in a bank. What’s more, if it is in a bank, you may be able to earn interest and lose less to inflation.

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If the United States were to experience an economic downturn on the scale of the Great Depression, your life would change dramatically. But it probably won't happen. There are seven reasons why a depression won't reoccur. The past Depression had taught the Fed how to avoid the next one.

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Bear Markets and Recessions

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Bear markets coincide with a recession. These 20 percent declines in stock market prices can also signal an impending recession or be the trigger that causes one.

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The Great Recession of 2008 was the worst recession since the Depression. The 1980 recession was almost as bad. It was caused by high interest rates needed to curb stagflation. Economic stagflation was a result of attempts to end the 1973 recession, which led to the demise of the gold standard.